Monthly Archives: January 2014

Silver Bottom is In ?….. Silver Is Now Recorded as the Most Undervalued Asset Within the Last 15 years of data !! by Mitch – Silver Sufferer

I actually started writing this article on Silver 5 days ago as a quick synopsis of where we are, but through new research and trading the silver market this last week I suddenly realised (also through conversations with fellow investors) that this silver market has broken below valuations that literally are beyond comprehension. I have never seen a market like this in over 25 years of trading and studying markets – I am not joking !.

If you are interested in Silver and its future potential then I suggest you read this piece in its entirety. Considering this piece has now turned into somewhat of a marathon, I needed to break it down into sections. ( 2013 Supply & Demand Deficit / Silver above ground Inventories / Mining costs of Silver / Gold ~ Silver Ratio / Ore grade degradation / Silver (ratio) valued against base metals /  Silver valued against Monetary aggregates,  followed of course with my very quick Conclusion). I could of course extend this article into numerous other avenues, but if you do not understand Silver at the end of this article I will physically hold up my hands and claim surrender.

Firstly you have to remember that there are no World Silver stockpiles to speak off, although estimates have been placed at between 800 Moz to 1.5 Boz above ground stockpiles these are predominately held within private hands (no official holdings) and will not see the light of day unless Silver is substantially revalued (compared with that other precious metal Gold, with estimated above ground stockpile of 6 Bio Ounces).

 

Silver 2013 Supply / Demand “Deficit”

Mine production is reported  to have grown by 4% this last year (2013) to 815 Moz (25,350 Tons), with production growth primarily coming from the US, Mexico and Dominican Republic. With reported re-cycled Silver to come in roughly around 240 Moz (although with such low prices of Silver achieved in 2013 recycling becomes awfully uneconomical) , then we have a total available supply of 1,055 Moz (32,815 tons) in 2013 (very approximate using official data)

Now as GFMS & Silver Institute have stated themselves, demand in 2013 shaped up as the following……

Industrial Applications  (46%) 458 Moz (14,245 Tons)

Photography (6%) 63 Moz (1,960 Tons)

Jewelry & Silverware (23%) 242 Moz (7,527 Tons)

Coins & medals (11%) 116 Moz   (3,608 Tons)  (coin demand in 2013 has been extremely strong).

Now according to my calculator that leaves just 176 Moz (5,474 Tons) left over for investment demand. (Implied Investment in 2012 was 160 Moz)

Turkey Silver imports surged to 228 tons in 2013 from a previous figure of 140 tons in 2012 and just 42 tons in 2011. This is recognised as pure investment demand.

While India have reputedly imported 5,400 tons of Silver in 2013. Now considering India’s yearly imports in 2012 was only 1,900, an increase of 3,500 tons can only be recognised as very dynamic investment demand (industrial usage of silver world wide has not just shifted to India in the last 12 months I can assure you).

So only looking at just 2 countries (India & Turkey) in 2013, Silver investment demand increased ’year over year’ by 3,600 tons from previous investment levels. These import figures demonstrate a severe supply / demand deficit in 2013 (and yet the price moved lower ?).

Now I have studied import data from all the major centre’s of import demand (present in 2012) and even though China imports have dropped off around 6% from the 2012 data in 2013, there are no major sources of demand that have dramatically dropped off. So if you include this enormous increase in import demand from just India and Turkey of 3,600 tons, the numbers simply do not add up ! There is a huge deficit …….

Indian Silver Imports 2007 - 2013

 

Silver above ground Inventories. Supplied the deficit hole in 2013 ?

The World relies on annual production and recycling to balance the supply / demand stresses. As you can see from the chart below, stockpiles of Silver have been decimated since the 2nd World War due to massive underinvestment, industrial demand for silver that has grown enormously with very little recycling due to the enormously artificial depressed prices of silver, hence it was simply un-economical (re-cycling that is) to do so.

So considering and World stockpiles of Silver is held privately (no Government stockpiles), we have to look at Silver physical holdings held in trust in the form of ETF’s. As you can see below and talked about here, Silver ETF holding saw zero selling and in fact actually experienced some small net inflows.

Silver Global ETF Holdings, Dec 5 2013 Silver Institute Presentation, via ETF Securities

This leaves us with a huge unanswered question, where did the Silver come from to fill this huge yearly Supply/ Demand deficit ?

 

Silver mining costs.

Silver mine production costs, which is quite simply the floor under the Silver price over the medium term (for obvious reasons). The World production of Silver by prime silver miners, is estimated at approximately $ 24 as a pure break even price with Capex investment heavily curtailed and exploration expenditure approaching zero (what businesses do you know off that actually operates at break even for any length of time, no profit ??). The primary miners managed to come out flat in the first 3 Qtrs of 2013 because they achieved an average of US$ 24.58 for their silver sales, however the silver price has capitulated much lower over the last 4 months to trade around US$ 20.00 approximately. This is effectively destroying their capabilities to be in the production business all together. Now do not mis-understand me, there are mining producers out there that can produce Silver and still make a reasonable profit margin at todays artificial price US$20  (these low cost primary silver miners will do enormously well as an investment in the next leg up in Silver prices), but taken on an average across the whole primary group that just simply is not the case.

Considering in 2012 (2013 numbers not in yet) primary silver miners accounted for 28% of total global production (the remaining majority of silver produced is as a by product of lead and zinc mining for example), any drop off  in production by the primary miners will devastate the finely balanced pendulum of global silver production.

See chart below courtesy of SRSrocco and his article ‘Silver price to Head Higher As Cost Production Forms A Base’

Top 12 Silver Miners Total 2013 Metrics

If you hold someone under water you eventually have to let them up for air otherwise you kill them outright. Mining production costs and hence Silver miners are losing money as a group for the last 4 months (4th Qtr 2013 & January 2014 so far..), if the Silver price does not rise substantially and very soon then quite simply miners will go out of business and production of metal will obviously fall dramatically. This will only aggravate the supply / demand deficit to even more extremes and eventually catapult the Silver price to extreme levels due to major shortages.

Gold / Silver Ratio

Gold Silver Ratio chart below as of 30th January 2014

Screen shot 2014-01-30 at 4.01.12 PM

Silver has not actually made all time nominal high in over 33 years (never mind inflation adjusted – in fact we could argue one of the rarest earth metals in existance has underperformed every commodity on planet earth). On the recent pattern only gold made an all-time nominal high, higher (but not much higher) than any previous highs. Silver only equalled its 1980 all-time nominal high (lower high). This is a major non-confirmation which signals that although the two patterns played out in a similar manner, it does not mean that the recent highs in 2011 is the end of the gold and silver bull market just like in 1980.

Courtesy of Hubert Moolman article….

However, why did we not get the final blow-off rally for silver, to a price much higher than any precious nominal high? Again, it can be best explained by looking at the Gold Silver ratio. Below, is the same 100-year Gold/Silver ratio chart:

However, here I show a more relevant comparison to the 70s bull market (pattern). On the chart, I have marked the 70s bull market with points 1 to 5. Instead of comparing it to the latest bull market, starting in 1999, I compare it to the period starting in 1980, when silver peaked in January of that year to now (which I have market 1 to 4, with point 5 still to come). If point 5 occurs lower than 15 (as illustrated), we will have a very accurate fractal (pattern), similar to the one of the 70s (but bigger).

This is a more relevant comparison since both patterns starts from a major peak in silver, 1968 and 1980, respectively. Both patterns started at the bottom of the 100-year range of this ratio, in fact, at a major bottom (1968 & 1980).

The current pattern has not completed yet, and it would suggest that it will only complete at a point much lower than a ratio of 15. Such a completion of the pattern is consistent with the bullish fundamentals of silver (and gold) in relation to paper money – understanding that a lower ratio will likely mean higher gold and silver prices.. Furthermore, it is consistent with the scenario that we are in a downtrend in the ratio; therefore, being, more likely to go lower over the next couple of years. A recent comparison of the relationship between the silver and Dow bull markets tell the same story.

Silver Ore Grade Degradation

Courtesy of SRSrocco article “Silver Price to Rise as Top Miner’s Production Evaporates”

One of the most insidious problems taking place in the gold and silver mining industry is the decline in falling yields.  Not many realize, when yields decline, production evaporates and disappears.  To offset the decline in metal yields, the mining companies have to add new mines and or increase the amount of processed ore. Increased amounts of ore processing entails massive increases in energy / oil consumption (that is rising in price)…

Top 6 Silver Companies Production & Processed Ore 2005-2012B

As you see from the graphic below (click to enlarge), the New Scientist Magazine conducted research (2006) in the true rarity of earth metals. This report actually followed up from a report by the USGS (United States Geologist Society) in 2005. Both reports have stated that Silver under present industrial usage and recycling practices will be extinct in industrial quantities by 2020 !!!

I remember reading these studies in 2006 and coming to the obvious conclusion that this development alone would elevate Silvers valuation trajectory far beyond what most people / investors thought at the time.

When the USGS was directly asked to follow up a few years later their response was…

I don’t believe that the USGS would ever use the term “extinct” in regards to the depletion of a resource. The USGS estimates current worldwide silver reserves are estimated to be 510,000 tons. The global demand for silver in 2009 was about 24,400 tons. If nothing else were to change, the implication would be that we’d run out of silver in about 20 years. However, new deposits are still being discovered, and scarcity should lead to higher valuation, which should eventually lead to more exploration interest. 

While cheap silver ore may become scarce, given the right price, it shouldn’t become extinct!

Regards, • Greg Durocher

• USGS Office of Communications &Publications

• Science Information Services –Alaska

I will give my remarks to this response in my conclusions at the end.

how long will it last


Silver (ratio) Valued Against Base Metals

Now the point of this exercise is to recognise if Silver over the last 14 years has actually appreciated against base metals (as would be expected due to its ongoing rarity) or has the market in Silver been priced artificially  lower than its true state of rarity ?

Silver data here and here, base metal data here.

Silver to Copper Ratio 
Date Commodity Price Silver Price Ratio
Jan 1999 Copper 0.7 US$/Ib US$ 5.10  oz 7.28
Jan 2004 Copper 1.2 US$/Ib US$ 6.30 oz 5.25
Jan 2009 Copper 1.6 US$/Ib US$ 11.50 oz 7.19
April  2011 Copper 4.3 US$/Ib US$ 49.08 oz 11.41
June 2012 Copper 3.5 US$/Ib US$ 28.08 oz 8.02
29th Jan 2014 Copper 3.5 US$/Ib US$ 19.30 oz 5.5

On this above example….the higher ratio number (on the right) the more valued Silver is in the market, what you can see from this demonstration is into the World Silver stockpile decimation (2007) and the early part of the decade the ratio was roughly 7. The enormous move in Silver in 2011 the ratio peaked at 11.4. As of today the ratio has recorded a low 5.5 and in fact Silver has lost over half of its value against copper since 2011 and is 25% cheaper than 14 years ago.  Has copper become much rarer and hence requires a greater valuation over and above Silver or in fact the opposite is true???
Do not forget that Copper is over 800 times more abundant than Silver in the earth’s crust.
Copper currently trades at 7,155 US$/Ton. Convert to Ounces = (7,155 / 32,150) 0.226 US$,   present Silver / Copper ratio = (19.2 / 0.226) 86  –   hence Silver is at least 900 % undervalued against Copper !!!!!

Silver to Lead Ratio
Date Commodity Price Silver Price Ratio
Jan 1999 Lead 491 US$/Metric Ton US$ 5.10  oz 96.27
Jan 2004 Lead 753 US$/Metric Ton US$ 6.30 oz 119.52
Jan 2009 Lead 1,145 US$/Metric Ton US$ 11.50 oz 99.57
April  2011 Lead 2,719 US$/Metric Ton US$ 49.08 oz 55.39
June 2012 Lead 1,850 US$/Metric Ton US$ 28.08 oz 65.88
29th Jan 2014 Lead 2,142 US$/Metric Ton US$ 19.30 oz 110.98
On this above example….the lower ratio number (on the right) the more valued Silver is in the market, what you can see from this demonstration is into the World Silver stockpile decimation (2007) and the early part of the decade the ratio was roughly around 100. The enormous move in Silver in 2011 the ratio bottomed at 55 (strong Silver). As of today the ratio the ratio is valued at 111, Silver has lost 15% of its value against Lead in the last 14 years and over half of its value since 2011.  Has Lead become much rarer and hence requires a greater valuation over and above Silver or in fact the opposite is true???

Silver to Zinc Ratio
Date Commodity Price Silver Price Ratio
Jan 1999 Zinc 931 US$/Metric Ton US$ 5.10  oz 182.55
Jan 2004 Zinc 1,015 US$/Metric Ton US$ 6.30 oz 161.11
Jan 2009 Zinc 1,202 US$/Metric Ton US$ 11.50 oz 104.52
April  2011 Zinc 2,371 US$/Metric Ton US$ 49.08 oz 48.31
June 2012 Zinc 1,855 US$/Metric Ton US$ 28.08 oz 66.06
29th Jan 2014 Zinc 2,000 US$/Metric Ton US$ 19.30 oz 103.62
The lower the ratio number (in this example) the more valued Silver is within the market, what you can see from this demonstration is slightly different from the previous 2 examples but with basically the same result.  The ratio started around 180 as a very weak silver price (undervalued) and then moved lower to record a low ratio of 48 in 2011. As of today the ratio has climbed back up to 2009 valuation.  Why has Zinc climbed in value against Silver of over double since 2011, Zinc much rarer than Silver ????

What you are finding in these examples is that Silver is ‘actually depreciating’ in value against base metals, base metals which are trading in abundance and have no recorded supply demand deficit or recorded extinction date of 2020 as far as extractable industrial quantities. They are not classified as a ‘Precious Metal’ and their above ground stockpiles have not vanished into toxic waste dumps due to the fact that re-cycling of silver is so un-economical due to its price and that it is simply thrown away, never to be recovered again.

In fact Silver has never been recorded this under-valued and artificial  (in relation to base metals) in the last 15 years, you have got to be kidding me, has the investment World gone mad   !!!

 

 

 Silver valued against Monetary aggregates

If you are measuring Silver against a particular yardstick (US$ – Fiat Currency), then a devaluation / destruction / overproduction of that particular currency (yardstick) has to be taken into context. Silver has not increased in quantity, but Fiat currency sure has…..

Submitted by Alasdair Macleod, Gold Money: “FMQ Update and the Implications for Gold & Silver”

I will not copy and paste is whole article (you can click the link above) but you can see from monetary aggregates that Silver is actually 15% cheaper than the Year 2,000 when  it averaged US$ 4.95 !!!

An explanation of how FMQ is derived please read and listen here.

This is illustrated in Chart 1 below.

FMQ

FMQ measures the difference between currency, measured by cash and deposits, and sound money by retracing the evolution of currency from gold and fully-backed gold substitutes. It is therefore fundamentally different from conventional measures of money supply, which compare changes in themselves over time. Instead it is a comparison between sound and unsound money.

Gold

The fourth chart shows the price of gold adjusted for the increases in FMQ and above-ground stocks of gold since January 1960, when gold was fixed at $35 (yellow line) compared with the nominal dollar price (red line).

gold-in-usd

At $1200 nominal, which was the gold price on 31 December 2013, the adjusted price is $76, slightly more than double the price in 1960 US dollars. We cannot put together the components of FMQ before 1959 because the statistics are not available, but at that time FMQ was similar in quantity to the discontinued M3 series at $292bn and $300bn respectively. M3 in 1933, when gold was revalued to $35, stood at $41.53bn[1], and above-ground gold stocks increased from 35,327 tonnes to 60,137 tonnes between 1933 and 1959. So measured in 1933 FMQ dollars the price of gold adjusted for the increase in above-ground gold stocks today is approximately $6.72.

The next chart shows gold in 2000 US dollars rebased to 100.

gold-adjusted

In these adjusted terms gold at $1200 nominal in December 2013 is 124% of its price in January 2000. At that time equity markets were in a bubble to rival the South Sea of 1725, systemic risk was the last thing on investors’ minds, and FMQ has since hyper-inflated. Furthermore the gold price in 2000 reflected protracted bear market sentiment that had built up over two decades.

Therefore, based on gold prices from the 1930s onwards gold in real terms appears extraordinarily undervalued.

Silver

The last chart shows the price of silver adjusted for the increase in FMQ and rebased to January 2000.

silver-adjusted

Since silver is mainly consumed as an industrial metal, and the strategic above-ground stocks accumulated in the last century are now depleted, it is not appropriate to adjust the silver price by changes in the quantity of silver when measuring it in FMQ terms. The adjustment over time is therefore entirely from the currency side. Taking this into account, the adjusted silver price at end-December is 85 on our index and so is at a 15% discount to the price at the beginning of January 2000, more than eliminating the price spikes in 2008 and 2011.

 

Conclusion

Silver has fallen precipitously since the 2011 peak and many commentators state that this was due to a commodity sell off and that Silver was overvalued, which is quite simply not true as I have proven against base metal valuations. Base metals which can be supplied in abundance to World demand and Silver has halved in value (against these base metals) and not only that, but is now trading significantly lower than 15 years ago against many of the base metals out there (copper & lead for example), how on earth can you reason this considering it rarity, production costs and its increased demand ?

Silver experienced a significant supply / demand deficit in 2013 and the supply to fill this hole I have not yet discovered from where it could have come from.  Ore grades in Silver are falling dramatically and production costs of mining Silver are significantly higher than todays levels. The USGS stated that Silver has to be significantly revalued to avoid industrial quantity extinction, which they target as early as the year 2020 and yet silver falls in price !!!

Silver is mined at a ratio of 9 to 1 against Gold production presently and has no available stockpiles above ground to access (unlike Gold) and yet the Gold Silver ratio trades at 65 !! Silver valued against the US$ (taking into consideration the increases in monetary aggregates) now trades 15% lower than the year 2000.

I know investors and people keep stating to me that price is the arbitrager (so end of story), but all you have to do is look under the bonnet and realise Silver is presently the most undervalued it has been in the last 15 years and faced with its fundamental backdrop is quite literally the most attractive opportunity I have ever seen. It is also the only commodity I know off that has never traded above its nominal high set 33 years ago, even with massive expansion of credit and available currency !!

I know where I want to put my money.

Good Luck

Mitch  - Silver Sufferer

 

David Morgan states the Silver low is in !

 

I have studied this issue as much as anyone other than The Moneychangerauthor Franklin Sanders. A 45-foot long historic silver chart covering the last 4,500 years, where each foot would be 100 years, shows that only in the last 19 inches the silver-gold ratio would be above 16:1. The 4,400 years before that, it would be less than 16:1! So, from a long-term perspective it means silver is undervalued to gold.

 

World Bank Ex-Chief Economist Calls For End Of Present Monetary System ….Courtesy of Zerohedge

Courtesy of Zerohedge

 

In the past we have discussed at length the inevitable demise of the USD as the world’s reserve currency noting that nothing lasts forever. However, when former World Bank chief economist Justin Yifu Lin warns that “the dominance of the greenback is the root cause of global financial and economic crises,” we suspect the world will begin to listen (especially the Chinese. Lin, now – notably – an adviser to the Chinese government, concludes that internationalizing the Chinese currency is not the answer (preferring a basket approach) but ominously concludes, “the solution to this is to replace the national currency with a global currency,” as it will create more stable global financial system.

The infamous chart that shows nothing lasts forever…

Nothing lasts forever… (especially in light of China’s earlier comments [21])

Via China Daily,

The World Bank’s former chief economist wants to replace the US dollar with a single global super-currency, saying it will create a more stable global financial system.

“The dominance of the greenback is the root cause of global financial and economic crises,” Justin Yifu Lin told Bruegel, a Brussels-based policy-research think tank. “The solution to this is to replace the national currency with a global currency.”

Lin, now a professor at Peking University and a leading adviser to the Chinese government, said expanding the basket of major reserve currencies — the dollar, the euro, the Japanese yen and pound sterling — will not address the consequences of a financial crisis. Internationalizing the Chinese currency is not the answer, either, he said.

China can only play a supporting role in realizing the plans,” Lin said. “The urgent thing is for the US and Europe to endorse these plans. And I think the G20 is an ideal platform to discuss the ideas,” he said, referring to the group of finance ministers and central bank governors from 20 major economies.

The concept of a global “super currency” tied to a basket of currencies has been periodically discussed by world leaders as well as endorsed by 2001 Nobel Memorial Prize-winner Joseph Stiglitz. A super currency could also be tied to a single currency, but the interconnectedness of world financial markets and concerns about the volatility that can occur as a result of the system being tied to one currency have made this idea less popular.

Arguments in favor of a global currency resurfaced during October’s US budget impasse, which forced the government to shut down(as we noted here).

“It is perhaps a good time for the befuddled world to start considering building a de-Americanized world,” a Xinhua News Agency commentary said on Oct 14. The piece argued that creating a new international reserve currency to replace reliance on the greenback, would prevent government gridlock in Washington from affecting the rest of the world.

In March 2009, China’s central bank governor, Zhou Xiaochuan, called for the creation of a new “super-sovereign reserve currency” to replace the dollar. In a paper published on the People’s Bank of China’s website, Zhou said an international reserve currency “disconnected from individual nations” and “able to remain stable in the long run” would benefit the global financial system more than current reliance on the dollar.

Of course, as we are seeing now, it’s not just the Chinese that are concerned..

On that note, David Bloom, global head of FX research at HSBC, said US monetary policy change “will bring fluctuations for emerging countries’ currencies and lead to financial instability”.

Chen Wenling, chief economist at the China Center for International Economic Exchanges, a government think-tank, said, “A supranational currency may be a new direction for development of the global financial system. It also requires different countries to cooperate in coordinating macroeconomic policies.”

Bloom and Chen both said China needs to play a more important role in global financial governance. But Bloom said it is difficult for international financial organizations to reach a consistent conclusion on how to improve the foreign exchange system.

He said the renminbi is predicted to be stronger this year, even against an appreciating US dollar, andinternationalization of China’s currency will accelerate when the government decides to further open the capital market.

Of course implementation will be painful…

Pierre Defraigne, executive director of the Madariaga College of Europe Foundation in Brussels, said of Lin’s infrastructure proposal, “It is excellent, but the problem is how to implement these plans to link those countries that need such infrastructural construction and those with enough foreign reserves, by using an effective global mechanism.”

As we noted previously, the muddle-through is over and there is no painless solution left…

Michal Krol, a researcher at the Brussels-based European Center for International Political Economy, said …

 

I don’t think that the largest economies and their currencies are at this moment ready for the introduction of a supranational currency,” Krol said. “Neither the EU nor China have financial markets and monetary systems yet that are sound, solid, predictable and well functioning to be the cornerstone for a global system. But, indeed, it is time to formulate the fundamentals for global monetary governance.”

World Risks Deflationary Shock as Emerging Markets Puncture Credit Bubbles ….by Ambrose Evans Pritchard

It is a remarkable state of affairs that the G2 monetary superpowers – the US and China – should both be tightening

Half the world economy is one accident away from a deflation trap. The International Monetary Fund says the probability may now be as high as 20pc.

It is a remarkable state of affairs that the G2 monetary superpowers – the US and China – should both be tightening into such a 20pc risk, though no doubt they have concluded that asset bubbles are becoming an even bigger danger.

“We need to be extremely vigilant,” said the IMF’s Christine Lagarde in Davos. “The deflation risk is what would occur if there was a shock to those economies now at low inflation rates, way below target. I don’t think anyone can dispute that in the eurozone, inflation is way below target.”

It is not hard to imagine what that shock might be. It is already before us as Turkey, India and South Africa all slam on the brakes, forced to defend their currencies as global liquidity drains away.

The World Bank warns in its latest report – Capital Flows and Risks in Developing Countries – that the withdrawal of stimulus by the US Federal Reserve could throw a “curve ball” at the international system.

“If market reactions to tapering are precipitous, developing countries could see flows decline by as much as 80pc for several months,” it said. A quarter of these economies risk a sudden stop. “While this adjustment might be short-lived, it is likely to inflict serious stresses, potentially heightening crisis risks.”

To read the rest of this article, read here…

2014: The Year The U.S. Shale Gas Bubble Bursts & The Boom For Precious Metals?…….by SRSrocco

2014: The Year The U.S. Shale Gas Bubble Bursts & The Boom For Precious Metals?

Filed in EnergyPrecious Metals by  on January 28, 2014

Place your bets wisely because 2014 may turn out to be quite the pivotal year for the markets.  As MSM and Wall Street continue to push the hype regarding the Great U.S. Shale Boom, serious cracks are beginning to appear in the natural gas market.

The forecast by the Shale Energy Industry that the U.S. will be able to grow its natural gas production for a decade at a price below $4.50 MMBtu, seems to be losing credibility as the price of natural gas has already shot above the $5 level.

Here we can see that in the first few weeks of 2014, the price of natural gas reached $5.20 MMBtu (million British thermal units – standard market trading unit).

NatGas Chart Jan 2014

Well, how can this be?  According to the article published during the middle of last year byEnergyWire:

Shale gas production doesn’t make a major upward move until 2016, according to EIA.Spot prices for natural gas at the major Louisiana pricing hub will drop to $3.12 per million British thermal units in 2014 and 2015, below this year’s average forecast price of $3.25, according to EIA’s Annual Energy Outlook. Prices don’t pick up until 2016 either, in the EIA assessment.

The EIA – U.S. Energy Information Agency stated in the summer of 2013 that the price of natural gas would drop to $3.12 in 2014 and 2015 (from this point on I am going to show natural gas prices without the MMBtu).

If we check out Bloomberg’s most recent energy market data, we can see that the current price of natural gas is almost $2.00 higher than the EIA’s forecast of $3.12 just a mere six months ago.

Natural Gas Price Bloomberg

While many in the industry are stunned by this $2.00 spike in the price of natural gas, if you follow the correct energy analysts… this is no surprise whatsoever.

One such energy analyst is Bill Powers of Bill-Powers.com, who recently wrote the book,“Exploding the Natural Gas Supply Myth: COLD, HUNGRY AND IN THE DARK.”

Cold Hungry And In The Dark

Many of Bill’s predictions in the book have already come true.  In a recent interview on The Energy Report, Bill stated the following:

Several of the predictions I made in the book have come true since the book hit the shelves in July. First, we’ve seen numerous shale plays head into decline. We’ve seen big declines from the Haynesville as well as the Barnett. The Fayetteville is in decline; there have been further declines in the Gulf of Mexico and Wyoming. But what has really changed is the North American natural gas market has become extremely unbalanced, which was what I had predicted would come to pass sometime in the 2013–2015 time-frame. The cold weather over the last six weeks has accelerated what I have been talking about in the book.

I predicted that gas prices would lead to layoffs and industry supply disruptions, and that’s already occurred. We’ve seen paper mills in New Hampshire lay people off because natural gas prices in New England were north of $50/million Btu ($50/MMBtu) for a period and remain very high. We’ve also seen incredibly high prices in New York, and this is a time of record production coming out of the Marcellus. These are really the first examples of the violent price spikes and industrial shutdowns we will see in other parts of the country.

Bill Powers

(Bill Powers, Bill-Powers.com)

I spoke with Bill last week and he shared some very troubling information and data on the U.S. Shale Gas Industry.  Bill believes a peak in U.S. shale gas production could occur in 2014 or 2015 at the outset.

The reason why Bill believes shale gas production in the United States will soon peak is due to the fact that the only shale gas field that is still growing is the Marcellus, located in Pennsylvania and West Virginia.  Without the growth of the mighty Marcellus, U.S. shale gas production would be already declining.

In the chart below, we can see that except for the Marcellus, the rest of the shale gas fields in the U.S. are in decline:

Montly Dry Gas Production from U.S. Shale Plays

As the Barnett, Fayetteville, Woodford and Haynesville shale fields peaked, gas production from the Marcellus (shown in brown) has increased substantially allowing overall production in the United States to continue to grow.

While the Eagle Ford Field (dark brown and on the top) is showing an increase in gas production, it is more a liquid oil play and without the huge growth from the Marcellus, its contribution alone would have not offset the declines in the other shale gas fields.

If the Marcellus peaks and declines in 2014, Bill thinks we may have seen a peak in overall U.S. gas production.  We must remember, the average annual decline rate for the top 6 shale gas fields is in the 33-34% range (CitiResearch).  It takes a great deal of new production to offset the loss of supply due to this high annual decline rate.

Bill also told me that due to the extreme cold weather and natural gas supply disruptions in the northeast, some energy utility companies in New York have been paying $150 for natural gas.

Furthermore, the cold arctic weather conditions taking place in the Midwest and Northeast have resulted in record natural gas withdrawals from the country’s underground storage.  In just the past two months, natural gas storage went from being in the middle of the 5-year average to a new record low.

U.S. Natuaral Gas Underground Storage

As we can see from the blue line, the country’s working gas in storage is now below the 5-year minimum average.  This is bad news as there seems to be no let-up in the ice-cold temperatures plaguing eastern part of the nation.

Bill forecasts that we are going to see prices of natural gas in the $5-$7 range in the next few years, with the possibility of much higher price spikes.  These price spikes could occur due to what Bill warns as much lower than average underground gas storage levels from the continued record withdrawals on top of declining domestic gas production in 2014.

Bill’s gloomy forecasts for the future of the shale gas industry is stark in comparison to many in the industry.  One analyst who sees things much differently in the shale gas industry, is Ron Muhlencamp.

Ronald Muhlenkamp

(Ronald Muhlencamp, Muhlencamp.com)

Ron who was interviewed by the same website – The Energy Report (a week after Bill’s interview) had this to say about the U.S. shale gas industry:

The gist of my presentation is that natural gas has become an energy game changer in the U.S. We are cutting the cost of energy in half.

…..Our production of gas has not peaked and is not declining. We are using fewer rigs drilling for gas, but each well, particularly if you drill horizontally instead of just vertically, is producing so much more gas. Production is not declining and isn’t likely to for at least a decade. At current rates, we can drill in Pennsylvania for another 50 years.

My forecast is $4/Mcf, give or take $1. We just had a big cold snap on the East Coast. What used to happen is any time you had a cold winter, the price of gas jumped. For instance, in 2005, when crude was selling about $50/barrel ($50/bbl), gas began the year at about $7/Mcf, which was on par with crude, but in the wintertime, it doubled and ran up to $14/Mcf. The recent cold snap took gas all the way up to ~$4.20/Mcf. Gas is going to be in that range for a long time.

Ron believes that natural gas in the U.S. will remain at the $4.20 level for a “long time.”  As I mentioned in the beginning of the article, the price of natural gas is already above $5.00.

Ron is so sure of his long-term natural gas forecast, he went on to make this comment in response to a question regarding Bill Powers’ predictions:

I’d be very surprised if the price in the next decade gets over $5/Mcf for any extended period of time because there’s an awful lot of gas that’s very profitable at that price. I’m willing to make that bet with Bill Powers.

It will be interesting to see how events in the U.S. natural gas markets unfold in 2014.  I got my money on Bill Powers.  I have been following Bill for several years and I believe his understanding of the shale gas industry is spot on.

I highly recommend reading Bill Powers book, Cold, Hungry And In The Dark.  You can also follow Bill at his twitter feed below:

https://twitter.com/billpowers1970

I will be including a great deal of information on the shale oil & gas industry in my upcoming first paid report, The U.S. & Global Collapse Report.  I have only touched on the subject matter in this article.

The Coming Boom In Precious Metals

I am not going to spend much time on the precious metals in this article, however, the next image says it all.  If a picture is worth a thousand words, then the table below is worth over $400 million (at current market prices):

Comex Gold Inventories 012814

In another stunning withdrawal, JP Morgan had  an additional 321,500 oz  gold ounces removed from its vaults today.  Since last Thursday, JP Morgan has lost 44% (20 metric tons = 643,000 oz) of its gold inventories.

Here is the Comex inventory table for last Thursday:

Comex Gold Inventories 12414

According to Harvey Organ, February is going to be a big delivery month with nearly 40 metric tons standing for delivery at the Comex.  It will be interesting to see if the Comex has the ability to settle with physical gold… or if will they be forced to settle paper gold contracts with cash only.

At some point in time, we are going to see a DEFAULT on the Comex.  All the naysayers who believe the precious metal markets are not manipulated…. 2014 may be the year “Ya Gonna Have to Eat Ya Hat.”

SRSroccoReport Twitter Button

JPM Loses 44% of its Gold in 4 days, plus Gold Hedging Falls to 11 Year Low

Another historical record withdrawal, JP Morgan had  an additional 321,500 oz  gold ounces removed from its vaults today.
Since last Thursday, JP Morgan has lost 44% (20 metric tons = 643,000 oz) of its gold inventories.


From the SRSRocco Report:

 

Here is the Comex inventory table for last Thursday:

Comex Gold Inventories 12414

 

 

This enormous fall in Global forward hedging of Gold by the producers is keeping the LBMA and Bullion banks up at night with cold shivers. Quite simply the system requires a constant stream of new Gold feeding directly to them (through these contracts) at a guaranteed artificially low price. When the miners do not play ball we have problems, especially considering the East are gutting the West of all available physical Gold.  Mitch  - Silver Sufferer

For the full FT article read here..

Global gold hedging falls to 11-year low

By Xan Rice

Global gold hedging falls to 11-year low…The outstanding volume of gold sold forward by mining companies fell to its lowest level in at least 11 years during the third quarter of 2013. The global hedge book decreased by six tonnes to 92 tonnes, Société Générale and Thomson Reuters GFMS said in a report on Tuesday. That is the lowest level since 2002, when the quarterly hedge reporting series began. The marked-to-market value of the hedge book also fell, by $248m, to $174m, in the three months to the end of September. Some 25 companies saw reductions in their hedge positions over the quarter, mainly due to deliveries into maturing contracts. The pace of de-hedging slowed compared with the second quarter of last year. But while the gold price rose from July to the end of September, this “did not motivate widespread producer hedging, despite the fact that the opportunity existed for hedging at higher prices,” the report noted.

Gold Markets in London & FT states “Demand Physical Delivery of Gold” by Mitch – Silver Sufferer

Posted: 27 January, 2014

Learn from Buba and demand delivery for true price of gold

From the Financial Times, reporter Neil Collins: “Learn from Buba and demand delivery for true price of gold: One day the ties that bind the actual and the traded commodity will snap:

A year ago the Bundesbank announced that it intended to repatriate 700 tons of Germany’s gold from Paris and New York. Although a couple of jumbo jets could have managed the transatlantic removal, it made security sense to ship the load in smaller consignments. Just how small, and over how long, has only just become apparent.

Last month Jens Weidmann, Bundesbank president, admitted that just 37 tons had arrived in Frankfurt. The original timescale, to complete the transfer by 2020, was leisurely enough, but at this rate it would take 20 years for a simple operation. Well, perhaps not so simple. While he awaits delivery, Herr Weidmann is welcome to come and look through the bars in the Federal Reserve’s vaults, but the question is: whose bars are they?

In the “armchair farmer” fraud you are told: “Look, this is your pig, in the sty.” It works until everyone wants physical delivery of their pig, which is why Buba’s move last year caused such a stir. After all nobody knows whether there are really 260m ounces of gold in Fort Knox, because the US government won’t let auditors inside.

The delivery problem for the Fed is a different breed of pig. The gold market is far more than exchanging paper money for precious metal. Indeed the metal seems something of a sideshow. In June last year the average volume of gold cleared in London hit 29m ounces per day. The world’s mines are producing 90m ounces per year. The traded volume was many times the cleared volume.

The paper gold in the London Bullion Market takes the familiar forms that bankers have turned into profit machines: futures, options, leveraged trades, collateralised obligations, ETFs . . . a storm of exotic instruments, each of which is carefully logged, cross-checked and audited.

Or perhaps not. High-flying traders find such backroom work tedious, and prefer to let some drone do it, just as they did with those money-market instruments that fuelled the banking crisis. The drones will have full control of the paper trail, won’t they? There’s surely no chance that the Fed’s little delivery difficulty has anything to do with the cat’s-cradle of pledges based on the gold in its vaults?

John Hathaway suspects there is. He worries about all the paper (and pixels) linked to gold. He runs the Tocqueville gold fund (the clue is in the name) and doesn’t share the near-universal gloom of London’s gold analysts, who a year ago forecast an average $1700 for 2013. It is currently $1,260.

As has been remarked here before, forecasting the price is for mugs and bugs. But one day the ties that bind this pixelated gold may break, with potentially catastrophic results. So if you fancy gold at today’s depressed price, learn from Buba and demand delivery.

 

Another “typical” London market (LBMA) day (27th January 2014) in the precious metals, where all bullish technical data is ignored and roaring fundamental macro data is equally brushed aside in the pursuit of driving metal prices lower in the West (they really do not get it !), to give you an idea of the market structure and fundamentals at the moment…

Technically we had an extremely ‘bullish weekly close’. Simply put, last weeks range in the price of Gold exceeded the previous week and also closed higher than the previous weeks high. (Week Jan 13th  - 1,260  - 1,234.40 close 1,256.30)   –   (Week Jan 20th 1,279.30 – 1,231.70, close 1,275.60). Gold also closed above an important trend line that was confirmed on the weekly close.

Screen shot 2014-01-27 at 5.47.07 PM

Comex has now positioned itself with a record breaking 112 ratio of open long positions to actual available (Registered) gold inventory. Since registered gold stocks were relatively unchanged during the week, it is no surprise that our owners-per-registered ounce ratio remained at its all-time high of 111.6 claims per registered gold ounce. What that effectively means is if less than 1% of COMEX outstanding contracts stand for delivery there will not be enough gold to meet the delivery requirements.

 JPM has the largest recorded one day depletion in its gold inventory of 10 tons of physical Gold, previous accumulation by JPM is depleted in one single delivery. The West effectively being gutted like a fish off all physical Gold by the East ?

 Emerging Market crisis is still ongoing and then London walk in and smash gold lower ??  

Now something else to think about , who is long gold here and who is short on the exchanges ?

Lower metal prices run counter-intuitively to Western Central Bank interests in the here and now ….. massive accumulation by the East of physical  Gold and Silver has to be slowed down somehow, China alone for instance has physically imported 100% of available global Gold production in 2013 and so far this January has actually imported substantially more than global production levels – see here..

Bullion banks are actually long on the future exchanges (historical turnaround from record shorts), investment funds are presently short in substantial size (who are the mugs here ?) ,

Central banks need to instigate inflation as fear of a deflationary environment is keeping them up at night (falling metal prices is hardly inflationary) and finally Gold is trading well below production costs which has murdered gold Capex (Capital Expenditure and Investment) and exploration investment / discoveries, hence gold production is actually forecast to shrink globally over the next few years !

Silver accumulation by the East in 2013 was nothing short of spectacular,  India alone imported a new world record amount of the metal for investment purposes. The previous largest import of silver was in 2008 which was 5,048 tons, India reputedly imported 5,400 tons (approximately) in 2013. The wold presently produces approx 22,000 to 24,000 tons , so india imported approx 23% of all World silver production.

Indian Silver Imports 2007 - 2013

Everything is pointing higher here in metals, maybe we see US$18 in Silver on the future paper exchanges in a paper manipulated sell off so the banks can clean up and get themselves massively long in Silver (along with their Gold Longs) ,  but the upside potential in the slightly bigger picture is spectacular here…..

 

A good read today, King World News  The Entire World Is Being Turned Upside Down In 2014

On the heels of unprecedented actions being taken across the globe, today a 40-year market veteran sent King World News which warns that the whole world is being turned upside down in 2014.  He also discusses how savvy investors are positioning themselves ahead of the coming turmoil.  Robert Fitzwilson, who is founder of The Portola Group, put together the following tremendous piece below exclusively for King World News.

By Robert Fitzwilson of The Portola Group

January 27 (King World News) – The Entire World Is Being Turned Upside Down In 2014

January is continuing to produce a mirror image of the start to last year.  From January 1st to January 24th in 2013, the popular equity indexes rose between 4% and 6%.  The Amex Gold Bugs Index, the HUI, fell 8% and gold slid 1%.  The divergence between asset classes was quite striking.

 

Best of luck

Mitch, Silver Sufferer

 

Gold Physical Withdrawals from SGE Exceed World Production, January 2014…….by Koos Jansen

As a quick back-of-the-envelope calculation,  available gold production yearly is 2,200 tons approx ,  52 weeks in the year gives 42.3 tons a week  ,   3 weeks = 127 tons  ,   China Shanghai Exchange imports (deliveries) for 3 weeks = 160 tons !!!

The West continues to ignore this, until its to late of course !!  - Silver Sufferer.

Original post at Koos Jansen site In Gold We Trust

Week 3, 2014 Withdrawals From SGE Vaults 60 Tons, YTD 159 Tons

Again an astounding trading week on the SGE; from January 13 – 17, 2014 physical withdrawals from the SGE vaults accounted for 60 tons of gold, year to date 159 tons. Although withdrawals are down 25 % from the previous week, the amount is still well above weekly global mine production.

This strong demand could be related to the Chinese Lunar year, which is celebrated on January 31, 2014. SGE withdrawals in the first three weeks were up 60 % compared to the same period in 2013.

A friend of mine who is traveling through Asia at the moment sent me a text message yesterday, it stated:

On three separate occasions I met with Chinese men who told me with a big smile China is buying A LOT of physical gold with printed dollars, they don’t understand why the rest of the world is just watching this happening. These people are positive the price of gold is going to rise substantially.

 

Overview SGE data 2014 week 3

 

- 60 metric tonnes withdrawn in week 3, 13-01-2014/17-01-2014

- w/w  - 25 %, y/y + 98 %

- 159 metric tonnes withdrawn year to date

Sources: SGEUSGS

My research indicates that SGE withdrawals equal total Chinese gold demand. For more information read thisthisthis and this.

Shanghai Gold Exchange withdrawals 2014 week 3

This is a screen dump from Chinese SGE trade report; the second number from the left (本周交割量) is weekly gold withdrawn from the vault, the second number from the right (累计交割量) is the total YTD.

Shanghai Gold Exchange gold withdrawals week 3 2014

This chart shows SGE gold premiums based on data from the Chinese SGE weekly reports (it’s the difference between the SGE gold price in yuan and the international gold price in yuan).

Shanghai Gold Exchnage gold premiums

Below is a screen dump of the premium section of the SGE weekly report; the first column is the date, the third is the international gold price in yuan, the fourth is the SGE price in yuan, and the last is the difference.

Shanghai Gold Exchange premiums week 2 & 3 2014

In Gold We Trust

SGE foreign exchange gold system

The Big Reset, Part 2…… Koos Jansen interviews Willem Middelkoop

Original post at Koos Jansen site In Gold We Trust

The Big Reset, Part 2

This is part two of a Q&A with Willem Middelkoop about his new book The Big Reset. In his book a chapter on the ‘War on Gold’ takes a prominent position. Willem has been writing about the manipulation of the gold pricesince 2002 based on information collected by GATA since the late 1990’s. So part two of our interview will focus on this topic.

The War On Gold

Why does the US fight gold?

The US wants its dollar system to prevail for as long as possible. It therefore has every interest in preventing a ‘rush out of dollars into gold’. By selling (paper) gold, bankers have been trying in the last few decades to keep the price of gold under control. This war on gold has been going on for almost one hundred years, but it gained traction in the 1960′s with the forming of the London Gold Pool. Just like the London Gold Pool failed in 1969, the current manipulation scheme of gold (and silver prices) cannot be maintained for much longer.

What is the essence of the war on gold?

The survival of our current financial system depends on people preferring fiat money over gold. After the dollar was taken of the gold standard in 1971, bankers have tried to demonetize gold. One of the arguments they use to deter investors from buying gold and silver is that these metals do not deliver a direct return such as interest or dividends. But interest and dividend are payments to compensate for counterparty risk – the risk that your counterparty is unable to live up to its obligations. Gold doesn’t carry that risk. The war on gold is, in essence, an endeavor to support the dollar. But this is certainly not the only reason. According to a number of studies, the level of the gold price and the general public’s expectations of inflation are highly correlated. Central bankers work hard to influence inflation expectations. A 1988 study by Summers and Barsky confirmed that the price of gold and interest rates are highly correlated, as well with a lower gold price leading to lower interest rates.

Nixon kissinger

 

When did the war on gold start?

The first evidence of US meddling in the gold market can be found as early as 1925 when the Fed falsified information regarding the Bank of England’s possession of gold in order to influence interest rate levels. However, the war on gold only really took off in the 1960′s when trust in the dollar started to fray. Geopolitical conflicts such as the building of the Berlin Wall, the Cuban Missile Crisis and the escalation of violence in Vietnam led to increasing military spending by the US, which in turn resulted in growing US budget deficits. A memorandum from 1961 entitled ‘US Foreign Exchange Operations: Needs and Methods’ described a detailed plan to manipulate the currency and gold markets via structural interventions in order to support the dollar and maintain the gold price at $ 35 per ounce. It was vital for the US to ‘manage’ the gold market; otherwise countries could exchange their surplus dollars for gold and then sell these ounces on the free gold market for a higher price.

How was the gold price managed in the 1960’s?

During meetings of the central bank presidents at the BIS in 1961, it was agreed that a pool of $ 270 million in gold would be made available by the eight participating (western) countries. This so-called ‘London Gold Pool’ was focused on preventing the gold price from rising above $ 35 per ounce by selling official gold holdings from the central banks gold vaults. The idea was that if investors attempted to flee to the safe haven of gold, the London Gold Pool would dump gold onto the market in order to keep the gold price from rising. During the Cuban Missile Crisis in 1962, for instance, at least $ 60 million in gold was sold between 22 and 24 October. The IMF provided extra gold to be sold on the market when needed. In 2010, a number of previously secret US telex reports from 1968 were made public by Wikileaks. These messages describe what had to be done in order to keep the gold price under control. The aim was to convince investors that it was completely pointless to speculate on a rise in the price of gold. One of the reports mentions a propaganda campaign to convince the public that the central banks would remain ‘the masters of gold’. Despite these efforts, in March 1968, the London Gold Pool was disbanded because France would no longer cooperate. The London gold market remained closed for two weeks. In other gold markets around the world, gold immediately rose 25% in value. This can happen again when the COMEX will default.

More evidence about this manipulation?

From the transcript of a March 1978 Fed-meeting, we know that the manipulation of the gold price was a point of discussion at that time. During the meeting Fed Chairman Miller pointed out that it was not even necessary to sell gold in order to bring the price down. According to him, it was enough to bring out a statement that the Fed was intending to sell gold.

Because the US Treasury is not legally allowed to sell its gold reserves, the Fed decided in 1995 to examine whether it was possible to set up a special construction whereby so-called ‘gold swaps’ could bring in gold from the gold reserves of Western central banks. In this construction, the gold would be ‘swapped’ with the Fed, which would then be sold by Wall Street banks in order to keep prices down. Because of the ‘swap agreement’, the gold is officially only lent out, so Western central banks could keep it on their balance sheets as ‘gold receivables’. The Fed started to informing foreign central bankers that they expected that the gold price to decline further, and large quantities of central banks’ gold became be available to sell in the open market. Logistically this was an easy operation, since the New York Fed vaults had the largest collection of foreign gold holdings. Since the 1930′s, many Western countries had chosen to store their gold safely in the US out of fears of a German or Soviet invasion.

 

Didn’t the British help as well by unloading gold at the bottom of the market?

Between 1999 and 2002, the UK embarked on an aggressive selling of its gold reserves, when gold prices were at their lowest in 20 years. Prior to starting, the Chancellor of the Exchequer, Gordon Brown, announced that the UK would be selling more than half of its gold reserves in a series of auctions in order to diversify the assets of the UK’s reserves. The markets’ reaction was one of shock, because sales of gold reserves by governments had until then always taken place without any advance warning to investors. Brown was following the Fed’s strategy of inducing a fall in the gold price via an announcement of possible sales. Brown’s move was therefore not intended to receive the best price for its gold but rather to bring down the price of gold as low as possible. The UK eventually sold almost 400 tons of gold over 17 auctions in just three years, just as the gold market was bottoming out. Gordon Brown’s sale of the UK’s gold reserves probably came about following a request from the US. The US supported Brown ever since.

willem middelkoop corbino 2012

 

How do they manipulate gold nowadays?

The transition from open outcry (where traders stand in a trading pit and shout out orders) to electronic trading gave new opportunities to control financial markets. Wall Street veteran lawyer Jim Rickards presented a paper in 2006 in which he explained how ‘derivatives could be used to manipulate underlying physical markets such as oil, copper and gold’. In his bestseller entitled Currency Wars, he explains how the prohibition of derivatives regulation in the Commodity Futures Modernization Act (2000) had ‘opened the door to exponentially greater size and variety in these instruments that are now hidden off the balance sheets of the major banks, making them almost impossible to monitor’. These changes made it much easier to manipulate financial markets, especially because prices for metals such as gold and silver are set by trading future contracts on the global markets. Because up to 99% of these transactions are conducted on behalf of speculators who do not aim for physical delivery and are content with paper profits, markets can be manipulated by selling large amounts of contracts in gold, silver or other commodities (on paper). The $200 crash of the gold price April 12 and 15, 2013 is a perfect example of this strategy. The crash after silver reached $50 on May 1, 2011 is another textbook example.

For how long can this paper-gold game continue?

As you have been reporting yourself we can witness several indications pointing towards great stress in the physical gold market. I would be very surprised when the current paper gold game can be continued for another two years. This system might even fall apart in 2014. A default in gold and/or silver futures on the COMEX is a real possibility. It happened to the potato market in 1976 when a potato-futures default happened on the NYMEX. An Idaho potato magnate went short potatoes in huge numbers, leaving a large amount of contracts unsettled at the expiration date, resulting in a large number of defaulted delivery contracts.  So it has happened before. In such a scenario futures contracts holders will be cash settled. So I expect the Comex will have to move to cash settlement rather than gold delivery at a certain point in the not too distant future. After such an event the price of gold will be set in Asian markets, like the Shanghai Gold Exchange. I expect gold to jump $1000 in a short period of time and silver prices could easily double overnight. That’s one of the reasons our Commodity Discovery Fund invests in undervalued precious metal companies with large gold/silver reserves. They all have huge up-side potential in the next few years when this scenario will play out.

 

 

 

In Gold We Trust

Synopsis of The Big Reset: Now five years after the near fatal collapse of world’s financial system we have to conclude central bankers and politicians have merely been buying time by trying to solve a credit crisis by creating even more debt. As a result worldwide central bank’s balance sheets expanded by $10 trillion. With this newly created money central banks have been buying up national bonds so long term interest rates and bond yields have collapsed. But ‘parking’ debt at national banks is no structural solution. The idea we can grow our way back out of this mountain of debt is a little naïve. In a recent working paper by the IMF titled ‘Financial and Sovereign Debt Crises: Some Lessons Learned and Those Forgotten’ the economist Reinhart and Rogoff point to this ‘denial problem’. According to them future economic growth will ‘not be sufficient to cope with the sheer magnitude of public and private debt overhangs. Rogoff and Reinhart conclude the size of the debt problems suggests that debt restructurings will be needed ‘far beyond anything discussed in public to this point.’ The endgame to the global financial crisis is likely to require restructuring of debt on a broad scale.

 

About the author: Willem Middelkoop (1962) is founder of the Commodity Discovery Fund and a bestselling Dutch author, who has been writing about the world’s financial system since the early 2000s. Between 2001 and 2008 he was a market commentator for RTL Television in the Netherlands and also appeared on CNBC. He predicted the credit crisis in his first bestseller in 2007.

 

Open Letter to the CPM Group …… by Koos Jansen

cpm-group-companynews

In all good faith to precious metal investors, I have to post this recent CPM Group notification; the blatant corruption of this organisation (led by Jeff Christian) is spectacular beyond belief. Even though it has been proven (through factual data presented in court) that several bullion banks have clearly broken commodity laws trading on the Comex futures exchanges for extreme lengths of time in the Gold and Silver markets (in which CPM group deny), in which 3 separate investigations where undertaken by the regulator (turning a blind eye is more accurate) CFTC, culminating in the longest commodity investigation ever undertaken in history (5 years) in Silver on the 3rd attempt. 

Now this organisation is imploring to its clients that Gold physical demand out of China is untrue – they simply take my breath away with their arrogance. Have you ever heard of the CPM group writing reports about any other commodity imploring their clients not to believe data coming out of a country that demand really was not that large and hence do not buy it – please ???

pdf …   Bad Suppositions on Chinese Bank Gold Purchases 

Courtsey of Zerohedge, reports on the big move in Gold with India talking about lifting import restrictions.

I will simply hand over Koos to clarify yet again what Chinese Gold demand really looks like…..

Mitch, Silver Sufferer

Original post at Koos Jansen site In Gold We Trust

Open Letter To CPM Group

To CPM Group,

On January 15, 2013 CPM Group released a Market Alert addressing the facts and fantasies being spread throughout the mainstream media and the financial blogosphere regarding Chinese central bank gold purchases. An endeavor much appreciated by me as I’m highly concerned with credible figures. In the article various subjects about the Chinese gold market are discussed, not on all do I wish to comment, but there was one I feel obliged to respond to. At one point CPM stated:

One of the commentators added gold deliveries via the Shanghai Gold Exchange to gross supply figures, apparently unaware that the gold involved in these deliveries gets re-delivered repeatedly via the exchange over time. Adding this gold to supply is confusing new supply with market turnover. 

Because I have been the most active reporter on SGE deliveries (or actually withdrawals) chances are this “one commentator is me. Hence my desire to share my point of view on this matter. I have written extensively on this in the past (which you can read hereherehere and here) but would like to present the rules as disclosed by the SGE and the implications from it on Chinese demand for physical gold once again.

Physical delivery on futures exchanges relates to the amount of gold in the vaults of the exchange that changes ownership after settlement between long and short contracts, a process that in theory can be repeated to infinity and therefore a complete inaccurate indicator for physical supply and demand. The Shanghai Gold Exchange, however, does not only publish data on physical deliverythey also publish data on the amount of physical gold that is being withdrawn from the SGE vaults. There has been confusion about the difference between SGE deliveries and withdrawals because the SGE has been naming withdrawals asdeliveries inconsistently. The numbers I’ve published on this website always related to the withdrawals from the SGE vaults (these numbers are only released by the SGE on their Chinese website).

The crucial SGE rule that makes the withdrawal numbers significant is this: once SGE bars are withdrawn from the vaults they are not allowed to be re-depositedThis rule can be found in the SGE rule book (#23), and, for example, is disclosed on several ICBC webpages regarding gold products.

(2) According to the Shanghai Gold Exchange rules, physical gold taken out of the warehouse cannot be taken into the gold warehouse designated by the Shanghai Gold Exchange again.

To be absolutely positive please call the SGE (phone number: 0086 2133189588), they speak fluent English and will confirm this rule.

The rule implies these withdrawals can’t be re-delivered. The purpose of the rule is that SGE bars are granted to be of the highest quality, no one can counterfeit an SGE bar and bring it in the vaults. The same rule applies on the Borsa Istanbul:

Once gold bars have been released from the Istanbul Gold Exchange vaults, they cannot be re-admitted to the Exchange vaults. They must be melted again and assayed and tested by an Istanbul Gold Exchange approved authority. Such re-melted gold is admitted in the Istanbul Gold Exchange again essentially as new gold bars and can then be traded. 

We can compare this type of policy with the LBMA Chain of Integrity. Bullion Management Group, which is a LBMA associate, states on its website:

If the documentation and the background checks passed scrutiny, then all bars coming from outside the Chain of Integrity are re-assayed and re-cast to Good Delivery standards.

The SGE rule combined with the Chinese laws that requires all imported and mined gold to be sold through the SGE, implies that the withdrawals are equal to total Chinese gold demand. The following quote is from theChinese media, translated by Soh Tiong Hum:

China’s explosion in demand for physical gold in 2013 left a deep impression on international investors. The Shanghai Gold Exchange its withdrawals for the year up till 27 December 2013 exceeded 2180 tons. Considering the exchange’s position as a hub for domestic gold circulation, in conjunction with a system that forbids withdrawn gold from re-entering inventory, to a large extent the withdrawals number can be treated as the best benchmark for physical gold demand in the Chinese market. Not to mention that the entire 2013 global mined gold production does not exceed 2700 tons. China’s massive demand has to a large extent remade the world’s gold circulation system. Newly mined and stocked gold are moving through trade links in London – Switzerland – Hong Kong – inland China in a large scale orientation towards the East. The impact of China’s demand on international gold price will inevitably increase.

I sincerely hope this information will clear some of the misconceptions of the Chinese gold market.

Kind regards,

Koos Jansen

 

Written by Koos Jansen on January 23, 2014 at 2:13 pm

First Domino to Fall : Commercial Real Estate ?…..posted by Max Keiser, by Charles Hugh Smith

The First Domino to Fall: Retail-CRE (Commercial Real Estate)

Posted on January 21, 2014 by Charles Hugh Smith

The domino of retail CRE will not fall in isolation; it will topple the domino of debt next to it.

That the retail trade is stagnating has been well-established: for example, The Retail Death Rattle (The Burning Platform).

Equally well-established is the vulnerability of the bricks-n-mortar commercial real estate sector to this downturn: yesterday’s analysis by Mark G. makes the case:After Seven Lean Years, Part 2: US Commercial Real Estate: The Present Position and Future Prospects.

I’d like to extend Mark’s excellent analysis a bit because it suggests that the retail CRE (commercial real estate) sector will likely be the first domino to fall in the next financial crisis–the one we all know is brewing.

Let’s start with two charts of retail that I have marked up: the first is a chart of retail traffic from The Burning Platform story above. Note the phenomenal building boom in retail space from 2000 to 2008: nine straight years of adding about 300 million square feet of retail space each year.

The second chart shows department store sales, which fell by 15% during the retail building boom.

It might be possible to argue that this additional 2.7 billion square feet of retail space was needed as competitors ate the department store chains’ lunches, but let’s start by considering the foundation of retail sales: consumer income and credit.

One way to measure income to adjust it for inflation (i.e. real income) and measure it per person (per capita) on a year-over-year (YoY) basis. Notice how real income per capita has absolutely cratered in the “too big to fail” quantitative easing (QE) era masterminded by the Federal Reserve: if this is success, I’d hate to see failure.

Another way to measure median household income:

There’s a big problem with per capita (and mean or average) measures of income: a significant gain in the the top 10%’s income will mask the decline in the bottom 90%’s income. If households earning $150,000 annually get a boost to $200,000, that $50,000 increase not only offsets the decline of nine households who saw their income decline from $35,000 to $31,500 annually, but pushes both the per capita income metrics higher even as 9 of 10 households experienced a 10% decline in income.

The point here is that the declines are far deeper for the bottom 90% than shown on the per capita chart, as the top 10%’s increase in income has skewed per capita income higher. We can see this clearly in this chart:

Notice how the income of the top 10% diverged from the bottom 90% once the era of financialization and asset bubbles started in the early 1980s. Each asset bubble–housing in the late 1980s, tech in the 1990s and housing again in the 2000s–nudged the incomes of the bottom 90% briefly into marginally positive territory while it spiked the incomes of the top 10% into the stratosphere.

There are only two ways households can buy stuff: with income or credit/debt, as in charging purchases on credit cards. We’ve seen that income has tanked for the bottom 90%; how about credit/debt?

Courtesy of Chartist Friend from Pittsburgh, we can see that revolving consumer credit has flatlined:

There’s another component to the erosion of bricks-n-mortar and the ascent of eCommerce, as Chartist Friend from Pittsburgh explains:

This M2 (money) velocity chart is better because it reminds us of the days when you would drive to the mall to make a purchase, and while you were there you’d stop at the food court to have lunch, and then maybe you’d walk around afterwards and see some other item you wanted to buy, or run into friends and decide to catch a movie or have a drink, etc. At the mall there are lots of ways for money to change hands – online not so much.

Fewer trips to the mall (correlated to maxed out credit cards, declining real disposable income and the ease of online shopping) also translates into fewer miles driven and fewer gallons of gasoline purchased:

All this boils down to one simple question: can the top 10% (roughly 11 million households) support the billions of square feet of retail space that were added in the 2000s? If the answer is no, as it clearly is, then the retail CRE sector is doomed to implode.

Let’s try a second simple question: what’s holding the retail CRE sector up?Answer: leases that will soon expire or be voided by insolvency, bankruptcy, etc. as retailers close stores and shutter their businesses.

One last question: who’s holding all the immense debt that’s piled on top of this soon-to-collapse sector? The domino of retail CRE will not fall in isolation; it will topple the domino of debt next to it, and that will topple the lenders who are bankrupted by the implosion of retail-CRE debt. And once that domino falls, it will take what’s left of the nation’s illusory financial stability down with it.